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OECD sees stronger world economy, but risks loom large

30/05/2018 - The global economy is experiencing stronger growth, driven by a rebound in trade, higher investment and buoyant job creation, and supported by very accommodative monetary policy and fiscal easing, according to the OECD’s latest Economic Outlook.

The pace of global expansion over the 2018-19 period is expected to hover near 4%, which is close to the long-term average. However, the Outlook also underlines that significant risks posed by trade tensions, financial market vulnerabilities and rising oil prices loom large, and more needs to be done to secure a strong and resilient medium-term improvement in living standards.

Low, albeit gradually rising interest rates coupled with fiscal easing in many countries will continue underpinning the expansion, which will see moderate rises in both wage growth and inflation. Unemployment in the OECD area is expected to drop to the lowest levels since 1980, but more can be done to bring more people into the workforce.

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“The economic expansion is set to continue for the coming two years, and the short-term growth outlook is more favourable than it has been for many years,” said OECD Secretary-General Angel Gurria. “However, the current recovery is still being supported by very accommodative monetary policy, and increasingly by fiscal easing. This suggests that strong, self-sustaining growth has not yet been attained.”

The Outlook highlights a range of risks to the current expansion. Oil prices have risen significantly in the past year, and, if sustained, could add to inflation while softening real household income growth. The threat of trade restrictions has begun to adversely affect confidence, and, if such measures were implemented, they would negatively influence investment and jobs.

Risks also remain that the normalisation of interest rates in some economies, notably the United States, could expose financial vulnerabilities and tensions created by elevated risk-taking in financial markets and high debt, especially in emerging market economies with high levels of foreign currency debt. Procyclical fiscal easing exacerbates these risks.

The Outlook calls for reforms to be stepped up, against the background of favourable short-term conditions and the need to secure more robust and more inclusive growth. It urges countries to boost investment in education and skills, as part of improvements in the use of tax and spending policies to raise living standards across the income distribution. It recommends policies to boost job creation and business dynamism in the economy, including improvements to digital and physical infrastructure, enhanced R&D collaboration between universities and industry, reduced barriers to entry in professional services sectors and less red tape.